Flight to cryptos: Evidence on the use of cryptocurrencies in times of geopolitical tensions

This paper examines trading activity in cryptocurrencies in times of geopolitical crises. Cryptocurrencies represent speculative assets as well as payment methods. This combination of features is not present in securities like stocks and bonds. The empirical analysis is based on a sample of 93 events associated to potential limitations of a fiat currency circulation and considers five cryptos (Bitcoin, Ether, Ripple, Dash, and Tether). We find that trading in cryptocurrencies increases with events of geopolitical tensions. The increase in cryptocurrencies trading in times of crises can be motivated by different explanations (e.g., protecting savings as the domestic currency devaluates, making payments as the domestic financial system is no longer available, avoiding sanctions) which are difficult to disentangle. A more specific analysis concerning the EU sanctions established in 2022 on Russia shows that crypto trading slows down when crypto-related services (wallet, account or custody services) are explicitly included in EU financial sanctions packages. A warning about data limitations: the data set only includes trading activities conducted on centralized exchanges (CEXs) and does not include transactions conducted on decentralized exchanges (DEXs). Sanctions are supposed to be more effective on CEXs where the platform acts as a custodian for trader's asset. We also examine trading activity from the Ukranian Hrvynia to cryptocurrencies and find a strong increase in outflow from Hrvynia since the beginning of the conflict. This finding – which is not affected by donations of cryptos received by Ukraine from abroad – is consistent with the hypothesis that Ukrainians increasingly exchanged their domestic currency for cryptocurrencies.